On 20th October, 2022, Reserve Bank of India (RBI), Deputy Governor, Shri T Rabi Sankar, delivered a Keynote address at the Annual Day event of Foreign Exchange Dealers Association of India (FEDAI) at Mumbai. The topic of this Keynote Address is “Internationalisation of the Rupee: Is it time to shift gears?”  The Crux of the Speech/ address is as below:

Why do I think internationalisation of the Rupee is a desirable objective of public policy? Some of the advantage are fairly obvious, as explained below

  • Use of Rupee in cross-border transactions mitigates currency risk for Indian business. Protection from currency volatility not only reduces cost of doing business, it also enables better growth of business, improving the chances for Indian business to grow globally.
  • It reduces the need for holding foreign exchange reserves. While reserves help manage exchange rate volatility and project external stability, they impose a cost on the economy. For example, there is a general agreement that India’s reserves are borrowed funds. Banks and corporate incur external debt at market rates which are then invested in Government securities issued by advanced economies (AEs).
  • The rate at which external debt is incurred is substantially higher than the return on reserves,. Assuming an interest differential of 2%, on a Reserve base of say USD 600 billion, the cost of reserves would work out to USD 12 billion, annually. This cost represents a transfer of income from India to AEs. Reducing the requirement of reserves would save some of this this loss of income.
  • Reducing dependence on foreign currency makes India less vulnerable to external shocks. For example, during phases of monetary tightening in US and strengthening dollar, excessive foreign currency liabilities of domestic business results in a de facto domestic tightening. The ‘Taper Tantrum’ episode in 2013 and the currency volatility experienced by most emerging market economies (EMEs) in recent months exemplify such risks. Reduced exposure to currency risk would substantially mitigate the pain of reversal of capital flows.
  • As the use of Rupee becomes significant, the bargaining power of Indian business would improve adding weight to the Indian economy, enhancing India’s global stature and respect. 

How do we go about the process of internationalisation of the Rupee?

 1. Enabling external commercial borrowings in Rupees (especially Masala Bonds) was one step. Though invoicing export and import in Rupees was long permitted, it was being resorted to for limited uses. The July 2022 Scheme of RBI permitting Rupee settlement of external trade created a more comprehensive framework, including the flexibility of investing surplus Rupees in Indian bond markets. We are receiving encouraging response from countries to participate in Rupee-based trading. The Asian Clearing Union is also exploring a scheme of using domestic currencies for settlement. An arrangement, bilateral or among trading blocs, which offers importers of each country the choice to pay in domestic currency is likely to be favoured by all countries, and therefore, is worth exploring. 

 2. As increased use of Rupee in cross-border transactions requires a unified global market in Rupee both in interest rates and currencies. Such unification would not only improve depth and liquidity of our markets, but they would also facilitate uniform pricing across borders. Accordingly, Reserve Bank has also been putting in place enabling conditions by way of linking the domestic Rupee interest rates and currency markets with offshore Rupee markets by enabling domestic banks to operate in the offshore markets. Concomitantly, Primary Dealers (PDs) have been allowed market making in forex markets to improve market liquidity. Further steps in this direction are enhancing transparency of global Rupee markets through a comprehensive Reporting framework. A desirable outcome would be if market-makers like banks and PDs centralize their global Rupee book in India. Among other benefits, this would improve risk management for Indian and global firms alike and enhance the global role for India’s financial sector.

 

 We have so far discussed the advantages. Let us know consider the risks.

 1. India is a capital deficient country, and hence needs foreign capital to fund its growth. If a substantial portion of its trade is in Rupee, non-residents would hold Rupee balances in India which would be used to acquire Indian assets. Large holdings of such financial assets could heighten vulnerability to external shocks, managing which would necessitate more effective policy tools.

 

 2. A reduced role for convertible currencies in external transactions could lead to reduced reserve accretion. At the same time, however, the need for reserves would also reduce to the extent the trade deficit is funded in Rupees.

3. Non-resident holdings of Rupees could exacerbate pass-through of external stimulus to domestic financial markets, increasing volatility. For instance, a global risk-off phase could lead non-residents to convert their Rupee holdings and move out of India.
 

The Keynote address concluded as follows

 These risks are real, but they are unavoidable if India is to progress to be an economic superpower. Macroeconomic policy would need to measure up to such risks. Internationalisation would make domestic monetary policy more challenging but the alternative of compromising on growth by playing it safe is clearly not an optimal choice. We need to calibrate our moves to the evolving size of our economy, particularly the size of the external sector and to our appetite for risk in framing policy for external trade and capital flows. But the direction is clear.

 

My Perspective 

This is one of the best keynote address, which I have come across over the Years. The best part of the address is the DG, RBI has also highlighted the risks involved in making Internationalisation of Rupee. The prevailing macroeconomic conditions is really not conducive to this move. But, if macroeconomic conditions gets better as RBI is expecting then, the main challenge will be how India is going to handle its macroeconomic policy framework.

On 20th October, 2022, Reserve Bank of India (RBI), Deputy Governor, Shri T Rabi Sankar, delivered a Keynote address at the Annual Day event of Foreign Exchange Dealers Association of India (FEDAI) at Mumbai. The topic of this Keynote Address is “Internationalisation of the Rupee: Is it time to shift gears?”  The Crux of the Speech/ address is as below:

Why do I think internationalisation of the Rupee is a desirable objective of public policy? Some of the advantage are fairly obvious, as explained below

How do we go about the process of internationalisation of the Rupee?

 1. Enabling external commercial borrowings in Rupees (especially Masala Bonds) was one step. Though invoicing export and import in Rupees was long permitted, it was being resorted to for limited uses. The July 2022 Scheme of RBI permitting Rupee settlement of external trade created a more comprehensive framework, including the flexibility of investing surplus Rupees in Indian bond markets. We are receiving encouraging response from countries to participate in Rupee-based trading. The Asian Clearing Union is also exploring a scheme of using domestic currencies for settlement. An arrangement, bilateral or among trading blocs, which offers importers of each country the choice to pay in domestic currency is likely to be favoured by all countries, and therefore, is worth exploring. 

 2. As increased use of Rupee in cross-border transactions requires a unified global market in Rupee both in interest rates and currencies. Such unification would not only improve depth and liquidity of our markets, but they would also facilitate uniform pricing across borders. Accordingly, Reserve Bank has also been putting in place enabling conditions by way of linking the domestic Rupee interest rates and currency markets with offshore Rupee markets by enabling domestic banks to operate in the offshore markets. Concomitantly, Primary Dealers (PDs) have been allowed market making in forex markets to improve market liquidity. Further steps in this direction are enhancing transparency of global Rupee markets through a comprehensive Reporting framework. A desirable outcome would be if market-makers like banks and PDs centralize their global Rupee book in India. Among other benefits, this would improve risk management for Indian and global firms alike and enhance the global role for India’s financial sector.

 

 We have so far discussed the advantages. Let us know consider the risks.

 1. India is a capital deficient country, and hence needs foreign capital to fund its growth. If a substantial portion of its trade is in Rupee, non-residents would hold Rupee balances in India which would be used to acquire Indian assets. Large holdings of such financial assets could heighten vulnerability to external shocks, managing which would necessitate more effective policy tools.

 

 2. A reduced role for convertible currencies in external transactions could lead to reduced reserve accretion. At the same time, however, the need for reserves would also reduce to the extent the trade deficit is funded in Rupees.

3. Non-resident holdings of Rupees could exacerbate pass-through of external stimulus to domestic financial markets, increasing volatility. For instance, a global risk-off phase could lead non-residents to convert their Rupee holdings and move out of India.
 

The Keynote address concluded as follows

 These risks are real, but they are unavoidable if India is to progress to be an economic superpower. Macroeconomic policy would need to measure up to such risks. Internationalisation would make domestic monetary policy more challenging but the alternative of compromising on growth by playing it safe is clearly not an optimal choice. We need to calibrate our moves to the evolving size of our economy, particularly the size of the external sector and to our appetite for risk in framing policy for external trade and capital flows. But the direction is clear.

 

My Perspective 

This is one of the best keynote address, which I have come across over the Years. The best part of the address is the DG, RBI has also highlighted the risks involved in making Internationalisation of Rupee. The prevailing macroeconomic conditions is really not conducive to this move. But, if macroeconomic conditions gets better as RBI is expecting then, the main challenge will be how India is going to handle its macroeconomic policy framework.

Internationalisation of Indian Rupee

On 20th October, 2022, Reserve Bank of India (RBI), Deputy Governor, Shri T Rabi Sankar, delivered a Keynote address at the Annual Day event of Foreign Exchange Dealers Association of India (FEDAI) at Mumbai. The topic of this Keynote Address is “Internationalisation of the Rupee: Is it time to shift gears?”  The Crux of the Speech/ address is as below:

Why do I think internationalisation of the Rupee is a desirable objective of public policy? Some of the advantage are fairly obvious, as explained below

  • Use of Rupee in cross-border transactions mitigates currency risk for Indian business. Protection from currency volatility not only reduces cost of doing business, it also enables better growth of business, improving the chances for Indian business to grow globally.
  • It reduces the need for holding foreign exchange reserves. While reserves help manage exchange rate volatility and project external stability, they impose a cost on the economy. For example, there is a general agreement that India’s reserves are borrowed funds. Banks and corporate incur external debt at market rates which are then invested in Government securities issued by advanced economies (AEs).
  • The rate at which external debt is incurred is substantially higher than the return on reserves,. Assuming an interest differential of 2%, on a Reserve base of say USD 600 billion, the cost of reserves would work out to USD 12 billion, annually. This cost represents a transfer of income from India to AEs. Reducing the requirement of reserves would save some of this this loss of income.
  • Reducing dependence on foreign currency makes India less vulnerable to external shocks. For example, during phases of monetary tightening in US and strengthening dollar, excessive foreign currency liabilities of domestic business results in a de facto domestic tightening. The ‘Taper Tantrum’ episode in 2013 and the currency volatility experienced by most emerging market economies (EMEs) in recent months exemplify such risks. Reduced exposure to currency risk would substantially mitigate the pain of reversal of capital flows.
  • As the use of Rupee becomes significant, the bargaining power of Indian business would improve adding weight to the Indian economy, enhancing India’s global stature and respect. 

How do we go about the process of internationalisation of the Rupee?

 1. Enabling external commercial borrowings in Rupees (especially Masala Bonds) was one step. Though invoicing export and import in Rupees was long permitted, it was being resorted to for limited uses. The July 2022 Scheme of RBI permitting Rupee settlement of external trade created a more comprehensive framework, including the flexibility of investing surplus Rupees in Indian bond markets. We are receiving encouraging response from countries to participate in Rupee-based trading. The Asian Clearing Union is also exploring a scheme of using domestic currencies for settlement. An arrangement, bilateral or among trading blocs, which offers importers of each country the choice to pay in domestic currency is likely to be favoured by all countries, and therefore, is worth exploring. 

 2. As increased use of Rupee in cross-border transactions requires a unified global market in Rupee both in interest rates and currencies. Such unification would not only improve depth and liquidity of our markets, but they would also facilitate uniform pricing across borders. Accordingly, Reserve Bank has also been putting in place enabling conditions by way of linking the domestic Rupee interest rates and currency markets with offshore Rupee markets by enabling domestic banks to operate in the offshore markets. Concomitantly, Primary Dealers (PDs) have been allowed market making in forex markets to improve market liquidity. Further steps in this direction are enhancing transparency of global Rupee markets through a comprehensive Reporting framework. A desirable outcome would be if market-makers like banks and PDs centralize their global Rupee book in India. Among other benefits, this would improve risk management for Indian and global firms alike and enhance the global role for India’s financial sector.

 

 We have so far discussed the advantages. Let us know consider the risks.

 1. India is a capital deficient country, and hence needs foreign capital to fund its growth. If a substantial portion of its trade is in Rupee, non-residents would hold Rupee balances in India which would be used to acquire Indian assets. Large holdings of such financial assets could heighten vulnerability to external shocks, managing which would necessitate more effective policy tools.

 

 2. A reduced role for convertible currencies in external transactions could lead to reduced reserve accretion. At the same time, however, the need for reserves would also reduce to the extent the trade deficit is funded in Rupees.

3. Non-resident holdings of Rupees could exacerbate pass-through of external stimulus to domestic financial markets, increasing volatility. For instance, a global risk-off phase could lead non-residents to convert their Rupee holdings and move out of India.
 

The Keynote address concluded as follows

 These risks are real, but they are unavoidable if India is to progress to be an economic superpower. Macroeconomic policy would need to measure up to such risks. Internationalisation would make domestic monetary policy more challenging but the alternative of compromising on growth by playing it safe is clearly not an optimal choice. We need to calibrate our moves to the evolving size of our economy, particularly the size of the external sector and to our appetite for risk in framing policy for external trade and capital flows. But the direction is clear.

 

My Perspective 

This is one of the best keynote address, which I have come across over the Years. The best part of the address is the DG, RBI has also highlighted the risks involved in making Internationalisation of Rupee. The prevailing macroeconomic conditions is really not conducive to this move. But, if macroeconomic conditions gets better as RBI is expecting then, the main challenge will be how India is going to handle its macroeconomic policy framework.

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